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The Irish Tax Man Strikes Again

NEW YORK (TheStreet) -- News that Actavis(ACT) has agreed to buy Forest Laboratories(FRX) for $25 billion puts a spotlight on Irish tax law.

Just last week, when I wrote about Mallinckrodt(MCK) buying Cadence(CAD), I noted in passing that while the Mallinckrodt name is German and the company's heritage is American, Mallinckrodt is technically based in Dublin.

What's going on here?

What's going on is that big companies are taking advantage of Ireland's low 12.5% corporate tax rate. Even that rate understates the country's tax advantage.

By using territorial taxation, which doesn't tax profits made outside the country at all, Ireland also gets around U.S. transfer pricing rules.

It's not just the tax rate that makes Ireland an attractive place to book profits, but what it actually calls subject to tax, the tax base. Ireland's is very low, making it very attractive to any company which, like a drug company, is based in intellectual property.

By placing intellectual property in an outright tax haven, such as Bermuda, and putting that under an Irish subsidiary, tech companies have avoided billions of dollars in U.S. tax over the years. By having two Irish units move costs from high-tax to low-tax countries, a strategy called the Double Irish, tax bills are reduced further.

Irish officials insist their country is not a tax haven, and some commentators here blame U.S. law rather than Irish law for all this, but the fact remains that Ireland is a great place to pretend to do business, even if the economy there is still recovering from the Great Recession.

While Actavis keeps its administrative offices in New Jersey and does its distribution from Florida, its official headquarters is at 1 Grand Canal Square, in a warren of new construction near the Dublin docks, a space not much bigger than a Grand Cayman postal box.

Forest posted about $157 million in net income for calender 2013 (its fiscal year ends in March), and its income before tax was $183 million. That barely scratches the surface of what accountants can do with Forest's numbers, using Irish tax law.

They must think they can do a lot. At $25 billion, Actavis is valuing Forest at about 7.3 times its current annual revenue. The deal comes less than a month after Forest announced it would buy Aptalis, best known for drugs to treat digestion problems for $2.9 billion. At the time of the acquisition, we reported Aptalis was expecting $700 million in revenue for fiscal 2015.

Forest has also begun a program aimed at cutting $500 million in expenses by 2016.

The Irish Development Authority is proud to note that nine of the top 10 largest drug companies are located in Ireland, with seven of the 10 largest drugs being produced there. But it's not because Irish scientists are the world's best. It's because Irish tax laws are the best in Europe, and some of the best anywhere.

All of which means that public companies technically based in Ireland have a big advantage in shopping for other companies, as Forest, Actavis and Mallinckrodt have just proven. Investors should expect others to follow their lead.

At the time of publication, the author owned no shares in companies mentioned here.